What is it about?
Quiz question: How high are the federal subsidies? Exactly. Hardly anyone can immediately give a reliable number. And this despite the fact that the subsidies make up a significant expenditure item in the federal budget.
The correct answer to the initial question is: Federal subsidies amount to CHF 48.5 billion per year. This corresponds to almost two thirds of total federal expenditure and 6.2 percent of total Swiss economic output.
The number is therefore significant, and all the more so at a time when the federal budget is in the red. For the first time since 2005, the requirements of the debt brake were not met last year. Just because a cushion has been saved in the compensation account over the past few years, this structural deficit does not trigger any immediate pressure to save.
However, even dampening the growth – and not even reducing it – of the subsidies is likely to be accompanied by shrill cries from the relevant lobbies. An overall view can therefore help not to lose the fiscal policy compass: The Institute for Swiss Economic Policy shows that subsidies of CHF 38 billion are questionable to superfluous from a welfare theory point of view, i.e. they generate more damage than benefit.
Why does it matter?
In Switzerland, the Federal Act on Financial Aid and Compensation (Subsidy Act, SuG) regulates the subsidies very precisely: in 2022, 288 selected recipient groups benefited from the special benefits awarded by the federal government in the amount of CHF 48.5 billion. The subsidies also solidify over time. Why actually? And why do they have a bad reputation?
At the beginning of every subsidy there is an asymmetry: on the one hand, subsidies are financed by all taxpayers. On the other hand, only a selected, exclusive circle benefits from them. One could say: privileges for the few, funded by the many.
A situation in which a few benefit greatly to finance a project while at the same time imperceptibly burdening many is like a public commons. With the result that many stakeholder groups are pushing for the tempting subsidy pots, while hardly any politicians are putting a stop to them. Because those who enable subsidies receive support and votes. The commons are therefore constantly in danger of being overburdened and overexploited: subsidies tempt society to overconsume without anyone really noticing or complaining.
Of course, there are also sensible subsidies – for example in the case of public goods that would otherwise not be provided. But this justification is all too often overused to justify subsidies that actually lead to overconsumption. On the one hand, the economy produces things that society would not ask for without the subsidies. On the other hand, other things are neglected because demand is tilting in favor of the subsidized products. More paternalism, less consumer sovereignty, less welfare for the population, and again: without anyone noticing.
Second, subsidies harbor moral risks because they encourage imitators. Anyone who can see how others are awarded grants and subsidies through clever lobbying does the same. An actual competition for special benefits begins – so-called rent-seeking, i.e. striving for pensions and thus for unearned income.
It was the US economist Gordon Tullock who, as early as the late 1950s, drew attention to how dangerous this competition for subsidies is for politics and society. Because the competition for special benefits is all about who benefits from redistribution. It is not opposed to any productive achievement for society.
The Evidence
So what is the situation in Switzerland now? Lukas Blohm, Martin Mosler and the writer from the IWP have developed a subsidy report with a traffic light scheme to better classify the problem. The report shows the development of 241 federal subsidies of over CHF 1 million over time, points out inefficiencies and provides estimates of where savings potential would also be associated with desirable efficiency potential.
The identification of the subsidies in our report follows the logic of the Federal Finance Administration. In principle, the classification used by the official statistics includes all expenditures that are made outside the actual state sector. A-fonds-perdu contributions total around CHF 45.8 billion and account for the largest share. With this form of contribution, mostly investment contributions or restructuring contributions, the public sector waives its repayment obligation from the outset. Other subsidies include loans, guarantees or equity.
According to our assessment, questionable subsidies are evident in almost all areas of expenditure. The problem does not only affect agriculture, which has been the focus for decades. Subsidies worth billions for the economy, transport, social welfare or relations with other countries should also be critically examined.
In concrete terms, for example, there is the question of the purpose of around CHF 1.7 billion for a building program and federal grants for the network surcharge fund, which will hardly have any impact on climate policy against the background of emissions certificate trading. But also strange subsidies such as payments of 106 million francs to a real estate foundation in Geneva, which finances subsidized loans for construction and renovation projects for international organizations, should be discussed unreservedly. Subsidies amounting to 43 million Swiss francs for film funding are hardly any better: Why should films be preferred to other leisure activities from jogging to bowling? Or this: The delivery discount for newspapers and magazines of over CHF 50 million, which puts digital media at a disadvantage, seems outdated. And what 25 million Swiss francs are supposed to achieve for a new regional policy, if at the same time more and more funds are distributed via financial equalization, is not immediately apparent to every taxpayer. The list could simply be continued.
What follows
The Federal Council estimates that deficits of a good CHF 2 billion in 2024 and CHF 3 billion from 2025 will have to be eliminated in the short term in order to be able to comply with the debt brake requirements in the coming years. In view of this pressure on state finances, it is high time to relieve public coffers and thus taxpayers of the subsidies in question. The list of harmful subsidies is long. All in all, the sum of the subsidies we have classified as red, i.e. particularly questionable, is CHF 6.7 billion. A further CHF 31.3 billion in federal subsidies, which are classified as yellow and therefore potentially harmful, offers further potential for savings.
It is clear: Consolidating the federal budget is always painful. It is also clear that this will provoke resistance from many stakeholder and recipient groups. But politics is not there to please these groups, it is to serve the citizens and taxpayers. With the above proposals, the IWP wants to provide a reliable basis for a long-overdue discussion.
Blog posts on the topic:
Claus-Friedrich Laaser and Astrid Rosenschon (IfW, 2018), Bubbling federal subsidies. The Kiel subsidy traffic light